South African Yields Soar, Rand Slumps as Labor Unrest Spreads

Oct. 8 (Bloomberg) -- South African yields rose the most
more than two years and the rand slumped to a three-year low as
strikes in the country’s mining and transportation industries
spread to other areas of the economy.

Yields on benchmark 6.75 percent bonds due March 2021
climbed 28 basis points, or 0.28 percentage point, the most
since June 9, 2010, to 7.01 percent by 3:50 p.m. in
Johannesburg. The rand declined 1.8 percent to 8.9222 after
earlier falling to 8.9942, the lowest since April 27, 2009. The
rand retreated 5.3 percent last week, its worst week since
September 2011.

Workers at Transnet SOC Ltd., South Africa’s ports and rail
utility, will go on a one-day stoppage on Oct. 15, joining truck
drivers who have been striking since Sept. 24. A union for
municipal workers filed a notice to embark on industrial action
nationally. Anglo American Platinum Ltd. fired 12,000 workers on
Oct. 5 as illegal stoppages in the mining sector increased. The
strikes may curb tax revenue as the government struggles to
contain spending after Moody’s Investors Service cut the
nation’s debt ratings.

“Money managers are looking at this and saying: maybe it’s
time to liquidate our long-rand positions,” Ion de
Vleeschauwer, chief dealer at Bidvest Bank Ltd. in Johannesburg,
said by phone. “We’ll have to live with a much weaker rand for
the foreseeable future.”

Sell Orders

The rand declined 3 percent on Oct. 5 as it breached so-called resistance levels, where traders cluster automatic orders
to sell the currency. More so-called stop-loss orders may be
triggered at 9 and 9.22 per dollar, Bruce Donald, a
Johannesburg-based currency strategist at Standard Bank Group
Ltd., South Africa’s biggest lender, wrote in a note e-mailed to
clients today.

Moody’s cut the nation’s credit rating to Baa1 from A3 on
Sept. 27, citing the government’s inability to deal with
economic and political challenges. Bond yields rose 22 points
last week even after the nation’s debt was included in Citigroup
Inc.’s World Government Bond Index.

“The bond market got hit by an increase in global
benchmark yields and ongoing concerns over the labor unrest in
the economy,” Theuns de Wet, head of fixed-income research at
Rand Merchant Bank in Johannesburg, and colleagues wrote in e-mailed comments. “Increasing pressure on the fiscus, lower
growth and social pressures will continue to weigh on the
sovereign risk premium.”

The rand’s three-month implied volatility against the
dollar climbed 1.4 percentage points today to 18.3 percent, the
highest in more than three months, indicating that options
traders see wider swings in the currency in coming weeks.

Worse to Come

“The uncertainty that these developments generate is not good
for financial markets or the currency,” Donald at Standard Bank
said. “In the short term, the labor situation could get worse.
We think it more likely than not that the rand will at least
test the 9-per-dollar mark.”

The cost of insuring South Africa’s debt using credit
default swaps over five years surged six basis points to 167,
the highest since June 28. The extra yield investors demand to
hold South African bonds maturing in 2021 rather than U.S.
Treasuries climbed five basis points to 5 percentage points.

The rand may extend declines as volatility and a
deterioration in risk perceptions prompt investors to sell the
nation’s stocks and bonds, according to Shilan Shah, a London-based Africa economist at Capital Economics, which today revised
its forecast for the rand to 9 a dollar by year-end, from a
previous estimate of 8.75.

“There are compelling reasons to expect the rand to
continue suffering falls in coming months,” Shah wrote in a
research note e-mailed to clients today. “Domestic political
unrest, a challenging external environment and a widening
current-account deficit could lead to further losses.”